Day: December 17, 2016

I don’t think I have ever written about closed-end funds. It’s not because there is anything inherently wrong with the structure. They’re like traditional mutual funds except they don’t trade according to a daily tally of the net asset value of the investments. Instead, they are traded like shares of stock which have a sale price that exists independent of the net asset value.

There is nothing wrong with this.

However, as you might guess, closed-end funds naturally struggle to attract a client base. If you are going to stuff a commodities-based closed-end fund with shares of Exxon, Conoco, Chevron, Shell, and BHP Billiton, why wouldn’t an investor just avoid the 1.5% annual expenses and buy the shares of the companies outright in their own names?

An advantage that I have coming of age in the 2000s is that I have no reference or anchoring point to the “good old days” when savers could get real returns just by holding money in a savings account at their local bank or agreeing to store some funds in a certificate of deposit. I think I once stumbled across an old Kiplinger’s magazine from the early 1990s that talked about how $100,000 in a savings account paying 5% could be reliably counted upon to generate over $400 per month in retirement income.

When Friedrich Hayek published “The Use of Knowledge in Society” in a 1945 edition of American Economic Review, he argued that an often neglected reason why capitalist economies create more wealth than centrally planned regimes is because of an information advantage. If you’re trying to sell coffee in Santa Cruz, California, you are going to know about the flavor demands, peak traffic hours, and seemingly idiosyncratic preferences of your customers better than a committee in Washington, D.C.

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